Professional Documents
Culture Documents
The supply side is on top of the management agenda in most companies, reflecting an increasing strategic attention to benefits that can be gained from cooperation with suppliers. In particular, partnering has been suggested to be the superior solution for making the most of supplier relationships. It is argued in this paper that this recommendation oversimplifies the issues involved and, if followed blindly, may be bad for practice. Developing partnerships with suppliers is resource-intensive and can be justified only when the costs of extended involvement are exceeded by relationship benefits. The article examines the economic consequences following from different degrees of involvement with suppliers. Our conclusion is that a company can be highly involved with only a limited number of suppliers and needs a variety of relationshipseach providing its different benefits. Furthermore, it is discussed how the extent of involvement relates to the economic importance of the supplier, the continuity of the relationship and the sourcing
strategy of the buying firm. The core of our argument is that the capacity to cope with a variety of relationships in differentiated ways has a profound impact on performance. When the approach of the buying firm shifts from purchasing to making the most of supplier relationships, a richer analytical framework is required to deal with the complexity of the new task. 2000 Elsevier Science Inc. All rights reserved
THE CHANGING SUPPLY SIDE IN BUSINESS The strategic importance of the supply side in companies increased considerably during the two last decades of the 1900s. These changes are commonly referred to as a shift from purchasing to supply management [1]. According to this perspective, competitive advantage no longer resides with a companys own innate capabilities, but rather with the relationships and linkages the firm can forge with external organizations [2]. Forging these linkages required a revision of the prevailing perspectives regarding purchasing efficiency and the role of suppliers [3]. It has been particularly emphasized that buying companies tend more and more:
Address correspondence to Lars-Erik Gadde, Department of Industrial Marketing, Chalmers University of Technology, SE-412 96 Gothenburg, Sweden. E-mail: laga@mot.chalmers.se
Industrial Marketing Management 29, 305316 (2000) 2000 Elsevier Science Inc. All rights reserved 655 Avenue of the Americas, New York, NY 10010
LARS-ERIK GADDE is a Professor at the Department of Industrial Marketing at the School of Technology Management and Economics, Chalmers University of Technology, Gothenburg, Sweden. IVAN SNEHOTA is an Associate Professor at the Department of Marketing at the Stockholm School of Economics, Sweden.
306
FIGURE 1.
308
The Posture of Supplier Relationships A review of the current literature reveals a general consensus on the importance and merits of partnership posture in supplier relationships. It has even been remarked that the type of relationships firms develop to suppliers will be the main source of future competitive advantage [9]. At the same time, feelings of confusion have been voiced about what exactly a partnership is [6] and in a recent review of the purchasing field [10], we found a warning for overselling partnership as a buzzword:
. . . used by all which read something about management or had attended some seminar or conference and then applied the new label to existing practice in an attempt to look trendy and aware as well as to demonstrate that they had really always behaved in the newly desired way.
There is no easy answer to the question about what makes a relationship a partnership. Common suggestions that partnership is a close relationship are vague and do not offer much help. Ford et al., argue that in order to give meaning to closeness one has to consider the degree of integration between the buying and the selling company [11]. A recent study [12] shows that the extent of integration between customer and supplier, expressed in terms of the specific investments made by either partner, has a clear impact on the performance of the relationship. A distinction is made between tangible assets (buildings, tools, equipment, and processes), and intangibles (time and effort spent on learning the business partners practices and routines). There is significant evidence that the size of investments dedicated to a specific counterpart . . . significantly correlates with practices
FIGURE 2.
311
FIGURE 3.
312
FIGURE 4.
313
costs account for most of the total costs. If the buying firm is small it may try to be perceived as a more interesting business partner by allocating the whole of its business to one supplier. However, if concerned about the vulnerability, it may avoid high involvement to retain the option of changing to another supplier. MANAGING IN RELATIONSHIPS Any company uses a set of supplier relationships as part of its business system, which impacts on its performance in different ways. The core of our argument is that the economic consequences of supplier relationships depend on the postures developed and, in particular, on the degree of involvement in each specific relationship. The capacity to cope with various types of relationships in differentiated ways has a profound impact on performance. Bensaous portfolio analysis of supply management principles found no major performance differentials among the four types of relationships [12]. These findings support the argument that there is no such thing as a generally best type of relationship. Both high- and lowinvolvement approaches have their pros and cons. However, Bensaous study also showed that each of the four postures contained both low- and high-performing relationships depending on the way they were handled. Obviously, management principles matter. Effective managing in relationships requires careful assessment of the economic consequences of prevailing postures and possible changes in the degree of involvement. While different models for assessing relationships have been presented [21], it remains a fact that, all too often, effects of relationships are only loosely assessed. For example, Cousins found that firms . . . appear to be pursuing supplier reductions without a clear assessment of the costs and benefits involved [7]. Kapour and Gupta observed a relationship where the customer . . . had been overpaying for services in the name of partnerships, the terms and the benefits of which could not be identified, let alone quantified [22]. A balanced assessment requires a wide-angle perspective on the costs and benefits of the relationship along the lines of the framework outlined in this paper. There is huge potential in better exploiting the opportunities offered by coping with suppliers. However, potential benefits are not reaped automatically. The success stories presented point out the necessity of reconsidering many of the existing purchasing practices and show the risks of overly generalized, undifferentiated solutions. 314
Our discussion on managing in supplier relationships highlights three issues: the need for monitoring and changing postures; the interactive nature of managing within relationships; and the impact of the relationship atmosphere. The prevailing degree of involvement characterizing a relationship must never be considered a permanent solution. Modifying the posture in the light of changing conditions is the critical issue in supply management. Changes in the contexts of relationships must be continuously monitored and analyzed in relation to the question of what is an economically justified degree of involvement in a specific relationship. If this is not done properly, buying firms may end up in either over- or underdesigned relationships, both of which have been shown to be paths to failure [12]. Over-designed relationships evolve when more resources than necessary are put into a relationship. Over-designed relationships are not only costly, but also tend to be risky because of the specific investments. High-involvement relationships are liabilities. There are times when it becomes necessary to reduce the degree of involvement. Sometimes substantial economic gains may be achieved by relying on standardized lowinvolvement relationships. At the other end of the spectrumunder-designed relationshipsthe movement needs to go in the opposite direction, because potential benefits may be achieved through higher involvement. Both increases and decreases in involvement are thus always options when considering changes of posture and neither applies generally, but only within the specific context of the ongoing relationship. When changes in the degree of involvement are considered, it has to be kept in mind that supplier relationships are two-sided, implying that the input and output of both customer and supplier determine performance. Interests and resources of both parties must be considered. In many cases, however, the role of the supplier tends to be decided only from the perspective of the buying firm. We agree with Quinn who argues that one of the most crucial issues in effective supplier management is to shift the buyer outlook toward managing the desired output rather than the operations of the suppliers. If the buyer imposes overly detailed requirements about how the job should be done . . . it will kill innovation and vitiate the suppliers real advantage [4]. Similar arguments are presented by Araujo et al., regarding how relationship productivity and innovativeness are affected by the way customers choose to access supplier resources [23]. Effective managing within relationships requires a per-
spective that takes both customer and supplier into consideration, rather than the one-sided perspective often reflected in supplier development programs. Our final element is the relationship atmosphere. Even in this case, we believe generally held attitudes need reconsideration. There are special risks in viewing arms length relationships as conflictual and portraying the partnership type of supplier relationships as friendly. All relationshipswhether of the high- or low-involvement typeare characterized by a mixture of conflict and cooperation. It may be of interest to observe that high-involvement relationships tend to involve more conflict than arms length relationships. It is true that in low-involvement relationships there are frequent and heated discussions about prices, delivery terms and quality levels, but on the whole there is not so much else to argue about. The higher the level of involvement between companies the greater the interdependence, and the more pronounced becomes the potential for conflicting interests. In high-involvement relationships the decisions concerning joint investments and product adaptations usually call for compromises on both sides. However, the presence of conflict is not only negative. On the contrary, diversity of goals and convictions are often mentioned as prerequisites for innovation and creative development. Strong conflicting interests and heavy commitment sharpen the focus of the parties and tend to guarantee that only solutions effective and acceptable to both parties are adopted. Managerial ImplicationsMaking the Most of Supplier Relationships Making good use of suppliers is different from buying well. Suppliers can do much more than delivering reasonably priced items on request. The supplier relationships represent some of the most important assets of a company and should thus be considered and treated with a similar logic to other types of investments. Exploiting some of the potential of a supplier requires that the operations of the two companies become more closely integrated in the various facets of the relationship. This involves extensive and intense interpersonal interaction, coordination of various activities, and mutual adaptations of resources, which entail costs for both companies. It would be a mistake, however, to apply the investment logic across the board. Heavy involvement with a supplier is not always feasible or desirable. First, it takes two to effectively integrate operations and the supplier
may lack the necessary motivation and interest. Second, in some situations potential relationship benefits are exceeded by the investment costs that are incurred. Third, there are always limits to the investments a company can afford and every investment competes with other opportunities. In practice, it means that companies are confronted with a variety of situations in relation to suppliers and have to deal with them through different postures. Furthermore, the buying company will have to reconsider the degree of involvement in each relationship in the light of changing conditions. We have argued that the ability to handle the relationships requires understanding, monitoring, and assessment of their economic consequences, as well as an insight into their interactive nature and in the forces driving the change. It is important to recognize that both the origins of changes and their implementation are always at least partly out of the companys control. Even when the analysis is focused on only two parties, it is clear that coping with a relationship is a complex task. Yet, if we are to understand the interactive nature of customersupplier relationships in business markets and their dynamics, the scope of analysis needs to be broadened. Each relationship is interdependent with a number of other relationships, together forming a network. Studies of business networks have documented the impact of customersupplier relationships on the development of companies and have shed some light on the interdependencies management has to cope with. Hakansson and Ford have discussed the changing reality facing managers today pointing to three paradoxes in business networks [24] that we find effective also when managing the supplier relationships. The first paradox regards the need to balance the involvement in the relationships a company has to suppliers and customers. Applied to the supply side of the company, the first paradox is:
Well-developed, high-involvement supplier relationships are at the heart of a companys survival and the basis of its growth and development. But the high-involvement relationships also tie the company into its current ways of operating and restrict its capacity to change. Supplier relationships are, for a company, both the impulse to development and the cage that imprisons it.
The second paradox relates to the interactive nature of relationships. We have emphasized the need to take the suppliers situation into account when considering appropriate postures for the buying company in order to reap 315
the desired benefits. Applied to supplier relationships, the second paradox is:
The supplier relationships of a company are the outcome of its strategy and its actions. But at the same time, the company is itself the outcome of the relationships and what has happened in them. It is, therefore, necessary to consider the position of the buying company from the premise that it forms its supplier relationships but also that it is itself formed by these. Both premises are equally valid.
Reconsidering Three Strategic Issues. European Journal of Purchasing and Supply Management 1(1), 2736 (1994). 4. Quinn, J.: Strategic Outsourcing: Leveraging Knowledge Capabilities. Sloan Management Review Summer, 1021 (1999). 5. Carlisle, J., and Parker, R.: Beyond Negotiation. Redeeming Customer Supplier Relationships. John Wiley and Sons, Chichester, 1989. 6. Minahan, T.: Is Partnering a Shame? Purchasing June 4, 6869 (1998). 7. Cousins, P.: Supplier Base Rationalization Myth or Reality? European Journal of Purchasing and Supply Management 5, 143155 (1999). 8. Hakansson, H., and Snehota, I.: Developing Relationships in Business Networks. Routledge, London, (1995). 9. Sheth, J., and Sharma, A.: Supplier Relationships. Emerging Issues and Challenges. Industrial Marketing Management 26, 91100 (1997). 10. Macbeth, D.: Partnering Why not? Proceedings of the 2nd Worldwide Research Symposium on Purchasing and Supply Management. London, 1998. 11. Ford, D., Gadde, L.-E., Hakansson, H., Lundgren, A., Snehota, I., Turnbull, P., and Wilson, D.: Managing Business Relationships. John Wiley and Sons, Chichester, 1998. 12. Bensaou, M.: Portfolios of BuyerSupplier Relationships. Sloan Management Review Summer, 3544 (1999). 13. Spekman, R., Kamauff, J., and Spear, J.: Towards More Effective Sourcing and Supplier Management. European Journal of Purchasing and Supply Management 5(2), 103116 (1999). 14. Dyer, J., Cho, D., and Chu, W.: Strategic Supplier Segmentation: The Next Best Practice in Supply Chain Management. California Management Review 40(2), 5776 (1998). 15. Kraljic, P.: Purchasing Must Become Supply Management. Harvard Business Review 61, SeptemberOctober, 109117 (1983). 16. Krause, D., and Ellram, L.: Critical Elements of Supplier Development. The Buying Firm Perspective. European Journal of Purchasing and Supply Management 3(1), 2131 (1997). 17. Gadde, L.-E., and Mattsson, L.-G.: Stability and Change in Network Relationships. International Journal of Research in Marketing 4, 2941 (1987). 18. Hahn, C., Kim, K., and Kim, J.: Costs of Competition: Implications for Purchasing Strategy. Journal of Purchasing and Materials Management 22(4), 27 (1986). 19. OEM-Buyers Are Up to the Same Tricks. Purchasing June 4, 6869 (1998). 20. Single Sourcing Some Love It, Some Fear It. Purchasing June 3, 2224 (1999). 21. Lamming, R., Cousins, P., and Notman, D.: Beyond Vendor Assessment. Relationship Assessment Programmes. European Journal of Purchasing and Supply Management 2(4), 173181 (1996). 22. Kapour, V., and Gupta, A.: Aggressive Sourcing: A Free Market Approach. Sloan Management Review Fall, 2131 (1997). 23. Araujo, L., Dubois, A., and Gadde, L.-E.: Managing Interfaces with Suppliers. Industrial Marketing Management 28, 497506 (1999). 24. Hakansson, H., and Ford, D.: How Should Companies Interact in Business Networks. Journal of Business Research (2000 forthcoming).
Finally, the third paradox refers to the aspirations to control what is going on in the relationship. We have argued that the buying company should avoid imposing restrictions and specifications on suppliers because this may limit their creativity and innovation. In particular, it may prevent them from making use of solutions emanating from their other relationships. The third paradox in managing supplier relationships is:
Both the supplier and the customer try to control and manage the relationship so as to achieve their own aims. This ambition is one of the key forces in development of the relationship and of the entire network. But the more that one of the companies is successful in its ambition to achieve control, the less effective and innovative will be the specific relationship and the whole supplier network over time.
Once the logic shifts from buying well to making the most of supplier relationships, the focus of management has to be modified toward managing within relationships. Managing within relationships is about coping with interdependencies. More complex and subtle issues than normally associated with purchasing management will face the management when the ambition becomes to make the most of supplier relationships. That is the consequence of recognizing the link there is between the supply management and the overall business strategy of the company. REFERENCES
1. Davis, T.: Effective Supply Chain Management. Sloan Management Review Summer, 3546 (1993). 2. Lewis, J.: The Connected Corporation. The Free Press, New York, 1995. 3. Gadde, L.-E., and Hakansson, H.: The Changing Role of Purchasing
316